European Economic Government and Fiscal Sovereignty. The European Exit Strategy from Financial Crisis

By Guido Montani, Vice-President of the Union of European Federalists
The crisis in the Monetary Union is at a crucial turning point.

On the 9th May the EU governments created a stabilization facility of 750bn euro in an attempt to avoid financial breakdown in heavily indebted member states but because France and Germany do not agree on the nature of European economic government there is a risk that this decision might turn out to be insufficient. The European Parliament, on the other hand, has for quite a time held the common position, recently reasserted by the leaders of the four main parties (People’s Party, Socialists, Liberals and Greens), that the only way to solve the complex problem of the present economic and institutional crisis is by resorting to the “Community Method” (or “federalist method”, according Jean Monnet). In brief, the European Parliament wants the Commission to become the EU’s “economic government”. But President Sarkozy and Chancellor Merkel do not agree. In their view the Council, not the Commission, should be the economic government of the EU.

In order to shed light on this disagreement we must point out that fiscal sovereignty is at stake in this debate: namely, that economic government and fiscal sovereignty are two sides of the same coin.

Fiscal sovereignty – The roots of the present crisis of the EMU go back to the Maastricht Treaty which cautiously instituted the Monetary Union with its own Central Bank while leaving the issue of Economic Union undetermined. In fact the EU budget, i.e. the means at the disposal of the Commission and European Parliament for European policies, is now becoming inadequate, being only 1 per cent of European GDP, while 90 per cent of its revenues come from national budgets. The EU budget therefore is not considered a powerful enough instrument for a European economic policy. This explains why the EU has no economic government.

It can easily be seen that the main cause of the present EMU crisis is the lack of adequate EU financial resources. The ratios between deficit and GNP, on one hand, and total public debt and GNP of the euro zone, on the other, are better than those of the USA. But, because the EU has a fiscal system split into national watertight compartments, international financial speculation was able to hit the weak point: Greece. In comparison, if the USA had no federal budget, but only 50 states’ individual budgets, some of those states would certainly have suffered the same speculative attack.

With reference to this, the President of the ECB, Jean-Claude Trichet, affirmed: “Nous sommes une fédération monetaire. Nous avons maintenant besoin l’équivalent d’une fédération budgetaire” (Le Monde, June 1st). Mr Trichet is right. If the EU were a fiscal federation – with a reform similar to the proposal of Delpa-von Weizsäcker of the Bruegel Centre, i.e. funding the 60 per cent of European member states’ debt, substituted by a Blue Bonds issue – the European financial market could reach a size similar to that of the USA: an alluring prospect for many international investors. Real European own resources are the key to strengthening the euro as a global currency.

Yet Germany strongly opposes this perspective because she does not want a “union of fiscal transfers”. The rough exchanges between the Germans who do not want to pay for Mediterranean spendthrifts and the Greeks who do not want to be judged like robbers are a clear indication that the time has come for a solution able to avoid a revival of nationalism. The right course to follow would be European fiscal federalism, i.e. that the citizens supply each level of government with its “own” fiscal resources. The Monetary Union was founded by transferring monetary powers from the nations to the EU with the creation of the ECB. Fiscal sovereignty is a more complex procedure by which Europeans decide how much to give to EU institutions and how much to keep within the nation state. The fiscal pressure on European citizens should of course remain unchanged. Nevertheless, citizens should be aware that the European Union’s own resources, whatever their size, must be assigned to “legitimate and autonomous” European institutions, i.e. to the Commission answerable to a bicameral parliament (this means co-decision between the European Parliament and the Council). Today, citizens are probably not aware that the EU spends 1 per cent of their income. Transparency in public finance is a crucial step toward European democracy.

If the problem of EU finances is considered from this point of view, any possible quarrel among national governments disappears. European citizens will certainly accept a minimum of fiscal solidarity to finance policies which increase the general wellbeing of all, be they German, Greek or any other EU nationality. European defence is a European public good, and so too is the Galileo satellite system and so on. Everyone can benefit from these services. Nobody is excluded. For this reason, it is necessary to single out, as the European Parliament has done, certain taxes as being especially suitable to European finances. The best and most likely solution would be a mixture of ecological and capital taxes plus a percentage of VAT.

European economic government – The Franco-German proposal to base the economic government on the Council raises many questions. In particular, it would be impossible to avoid a directoire of strong countries. The effects of governance of this kind are already visible. Germany, for example, is imposing financial austerity on all member countries. Such a policy is not wrong in itself. A rebalancing of national budgets is certainly necessary. But it is wrong that one government should impose its policy on the others and also to imagine that this policy is the only one Europe needs. France, for example, rightly remembers that growth is equally necessary. Without growth, austerity policies in some countries (think of Greece) soon becomes unsustainable and leads to social discontent and political riots. Nevertheless, the French stance is barren, since only very modest growth can be achieved in Europe by means of purely national policies. Even great Germany will experience growing difficulties since at least half its exports goes to other European countries. Either the EU must launch an effective plan supported by public opinion – similar to the Commission plan “2020” – or the crisis will worsen.

In order to become a true economic government, the European Commission would not need a huge amount of financial resources. The European Financial Stabilization Facility, just created, is almost half the present Community budget. With a budget of 2-2.5 per cent of EU GDP as proposed by the McDougall Report it is likely that a good distribution between national and European financial resources can be achieved. With an appropriate size of Community budget significant savings for European citizens will become possible, thanks to economies of scale for the provision of basic European public goods, the rationalization of expenses and a reduction in interest rates. Indeed, a Blue Bonds issue could be held at interest rates lower than those of German Bund, because it will become possible to collect capital from a wider geographical area than at present and from global investors who today prefer US Treasury Bonds.

To sum up, we should abandon any idea that Europe can overcome the present crisis with provisional measures such as those proposed by the Council. The Financial Stabilization Facility is not so credible among international investors since it is again based on the potential of national budgets. If, for instance, Italy honours in their entirety her May 9th engagements the Italian public debt could grow from the present 106 per cent to over 120 per cent. The true guarantee for a public debt is rooted in the citizens’ confidence in the public institutions issuing it. Today, a European government would be more credible than national governments acting divisively.

Devising a European exit strategy is difficult because it involves institutional and political problems. The European Parliament must therefore take on the responsibility of opening a free and wide ranging debate on fiscal sovereignty without taboos. Today, two parallel reforms are on the table: the Community budget reform and a new Growth and Stability Pact. These two reforms must be unified. A new European fiscal pact should be agreed. This will not be easy. Member states’ governments lack of confidence in the Commission and their residual national instincts hamper fiscal federalism and need to be overcome. For these reasons, it is necessary to involve all citizens and their representatives, both in the European Parliament and in national parliaments, in the debate. Substantial steps towards a European federal fiscal system can be achieved without amending the Lisbon Treaty, although a new Convention could be convened if the European Parliament judges it necessary. What matters is that the European citizens should be involved in any reform concerning fiscal sovereignty. Any other way out, such as a committee of experts giving advice to the Council, would not only be anti-democratic, but also illusory.